Pricier steel can be costly for economy

The Competition Commission has opened a suo motu probe into cartelisation by steel companies to set prices, which have been on the rise for some time now.

Indeed, Union Minister Nitin Gadkari had flagged the steel price rise, and even wrote to Prime Minister Narendra Modi seeking his intervention. In her latest Budget, Finance Minister Nirmala Sitharaman reduced the import duties on steel, half acknowledging the problem but reducing the import duty is not enough.

The role of steel cannot be over-emphasised. The downstream sectors are certain to be impacted by the rapid rise in steel prices over the last few months. The wholesale price of hot-rolled coil (HRC) rose 47 per cent between July and December 2020, according to data by Steel Insights. Hot-rolled band (HRB) export prices rose 58 per cent from June 2020 to an average $662 per tonne in December 2020 fuelled by higher Chinese demand. Prices have further risen in the New Year. Iron ore prices have also risen 50 per cent since June 2020 to average $155 per dmtu in December, according to a Crisil report. So, reducing the import duty from 15 per cent to 7.5 per cent is not sufficient.

The rise in steel price can affect economic recovery in the post-pandemic period . And, the government’s production-linked incentive scheme introduced under its Atmanirbhar policy last year for the industry could be stymiedby rising export

Dominating the market

Steel companies blame the rising price of iron ore, a key input for manufacturing steel, and the rising export of iron ore, with demand rising especially from China and other countries that have made a quick post-Covid turnaround. Also, ore mining is yet to resume fully in many States.

They also point to higher fixed costs, lower capacity utilisation, and overheads such as expenses related to Covid safety protocols for the higher prices. Besides, exporters say they have to pay higher freight charges as the maritime supply chain is twin-stressed because of rising international demand and a shortage of containers.

Despite being the second-largest steel producer, India’s per capita consumption is a paltry 72 kg against the world average of 225 kg and China’s 590 kg. In India, domestic consumption accounted for 88-92 per cent of total steel production in the last three financial years, with the remaining exported. With the domestic demand for steel coming back, a K-shaped recovery is seen in the steel sector where the bigger players are getting bigger and more profitable, and the smaller players are struggling and even hurtling towards bankruptcy.

Small players are hurting because of financial constraints and the high iron ore cost, even as large players have managed to ramp up production with capacity utilisation rates of above 90 per cent; one producer reported its highest-ever monthly production volumes in December. Large players also have captive iron ore mines and can control pricing and supply that they do not pass on to the end-users, creating artificial barriers and price bubbles.

For the top six integrated steel producers, with their own iron ore mines, the cost of production hasn’t risen, which is why their net earnings are at an all-time high. Domestic steelmakers claim that the rising prices are in sync with higher international prices

While the steel companies may have their reasons, the reality is that the the relentless rise in steel prices is hitting downstream industries, households, small businesses, and farmers hard. The already struggling micro and small enterprises (MSME) — most sensitive to cost fluctuations and market demand — will be particularly hit hard, as they operate on wafer-thin margins, and will not be able to absorb rising costs.

Prices of cars and commercial vehicles are likely to go up in the next few months. Farm equipment, such as tractors, will get pricier. Consumer appliances companies, meanwhile, may put up the price of their products such as refrigerators, and washing machines. The real-estate sector could also be impacted and home prices may rise in the first half of 2021. If steel prices do not moderate, costing of infrastructure projects is likely to get affected. All this can lead to consumers cutting discretionary spending, slowing the economy’s anticipated recovery in the fourth quarter of 2020-21 or even in the first half of 2021-22. There could be cascading effect on job creation.

A proposed solution

Though the import duty on steel has been halved to 7.5 per cent in the latest Budget, it should be brought down to zero to enhance supplies. Import of second-grade steel should also be restored to ensure a level playing field.

Since all steel majors have their iron ore mines, and the cost of production has not risen, the government has to intervene to freeze prices to avoid a hit to infrastructure projects, automotive, home appliances, agriculture implements, and MSMEs.

The government should also clamp down on iron ore exports, regulate steel prices, and liberalise steel imports to maintain the competitiveness of the industry and momentum of growth of the economy. All eyes are on the CCI to break the cartelisation soon.

The writer is Vice-Chairman, Sonalika Group; Vice-Chairman, Punjab State Planning Board, and Chairman of Assocham (Northern Council)